Dear Gail,

My husband calls me a worrywart, but I’m afraid we’re going to lose our home. He works for one of the “Big” (ha-ha, these days) Three and there are rumors that his facility here in Ohio will either have lay-offs or close completely. We bought this house a little more than 6 years ago and have always made our mortgage payments on time, but that’s with two paychecks coming in. Money would be extremely tight if we had to live off my income alone.

From what I hear on the news, we’re not unique. Apparently a lot of people are getting foreclosed on. Can you tell me what this involves and if there’s a way we might be able to save our home?

Thanks,
Sheryl

Dear Sheryl,

Remember all those stories about soaring real estate prices a couple of years back? Well, what’s soaring these days in those same markets are foreclosures, as late buyers, who thought they’d quickly turn a cool profit, were instead left holding an ARM — adjustable rate mortgage — that they couldn’t afford once interest rates started to increase.

According to RealtyTrac, in the first six months of this year, Nevada, Colorado and California earned the dubious honor of being the three states with the highest foreclosure rates in the country. However, what might surprise people is that several states from the Midwest, including your home state of Ohio, round out the top ten.

The main problem in your area isn’t greed, but economic conditions, particularly in the auto industry. Unfortunately, knowing that others are facing similar circumstances doesn’t make your situation easier.

States with the Highest Foreclosure Rates
Jan-June 2007

1. Nevada
2. Colorado
3. California
4. Michigan
5. Florida
6. Ohio
7. Georgia
8. Arizona
9. Connecticut
10.Indiana

The laws of each state determine the steps a lender has to take in order to foreclose on a property. The first one is always a “notice of default” (NOD), which is a letter sent by your lender notifying you that you are 90 days behind on payments. In addition, a lender may have to publish this information in a local newspaper.

But depending upon what you — yes, you — do next, the folks at RealtyTrac point out that there can be one of four different outcomes:

- You bring your payments current and your loan is reinstated. (Happy ending)
- You sell your home and pay off the loan, keeping “foreclosure” off your credit record. (You have to move but your credit rating is in tact.)
- You do nothing and your home is sold at auction by an attorney, trustee, or the local sheriff. (Not good.)
- You do nothing and the bank re-possesses your home with the intention of selling it. (Not good.)

The one thing you can take comfort in is that your lender — the bank or mortgage company — does not want your home. It’s in the finance business, not the real estate business. In other words, it is in your lender’s best interest to come up with an affordable plan that will enable you to keep your home.

Though you might not realize it, the place to start is with your existing lender, says Bill Nazur, co-author of Finding Foreclosures.

“It’s counter-intuitive,” Nazur says. “You’re in denial, fearful, and don’t want to pick up the phone and call the bank.”

Even if you get stuck in what feels like terminal “hold,” he advises you to hang in there. “It may take 15-20 minutes to get through. But they will respond and they will help you. The reality is it costs them so much more money to initiate foreclosure.”

Keep in mind that the days when the bank on "Main Street" held the actual mortgage on your house are long gone. Today, whether your loan was issued by a bank or a mortgage company, that institution no longer owns it. Instead, it was sold, bundled with other mortgages, and
re-sold as a package to investors.

In other words, your mortgage has been turned into a security. These days the mortgage issuer is essentially nothing but a collector of payments. “They’re paid a servicing fee of about ¼ - ½ percent. They’re not making a whole lot,” says Nazur.

The rest of your payment goes to other “handlers,” with the remains ending up in the hands of the investors who, by the way, expect to receive the monthly checks they were promised. If you default, your lender is still on the hook to make the payments! Their only alternative is to sell the property.

Now do you understand why they’re so motivated to negotiate new terms with you?

Everyone I spoke to on this topic said that if it looks as though you’re going to have a problem making your mortgage payments, you should FIRST approach your lender to see if they’re willing to work with you.

Moreover, sooner is better than later. It’s much better to say, “We are going to have a tough time making our monthly payment when the lay-offs begin two months from now,” instead of, “We’re not going to have the money to make our mortgage payment tomorrow.”

Usually, the solution involves re-financing your outstanding balance. Your new, more affordable loan, simply pays off your old one.

Michael Goodman, a CPA with Wealthstream Advisors in New York City, says one way to make your monthly payments a more manageable size is to extend the term of your mortgage, especially “if your credit rating is better now than it was when you took out your mortgage.”

For instance, say you’ve got a mortgage balance of $250,000 and you’re paying a fixed rate of 6.5 percent. If you re-finance with a 30-year mortgage, your rate might go up to 6.75 percent, but Goodman figures your payments would drop from $2,177/month to $1,621/month — $556 less.

Naturally, the longer term and higher interest rate mean that you will ultimately pay more for your home than if you had bought it with a 15-year mortgage. However, if your financial situation improves, you can always make bigger monthly payments than required and pay off the 30-year loan sooner.

It really comes down to this: how much is it worth it to you — literally — to remain in this house?

Goodman says that in cases where a client has significant equity built up (“at least 20 percent”)and only plans to remain in the home for a few more years, he might recommend the owner re-finance with an interest-only mortgage. However, because you’re not paying a dime toward the principal, this is really a last resort, a way to buy time.

Nazur, who was a mortgage banker, advises you to lay your cards on the table when you approach your lender. He says to explain honestly why you can’t meet your payments. “For instance, ‘I lost my job due to serious medical issues,’ or ‘I bought more house than I can afford.’”

If your situation is expected to be temporary, rather than initiating a new loan process, Nazur suggests requesting “forbearance.” This might involve having no payments for nine months and then at the beginning of month No. 10 you resume paying your mortgage and also start paying back the amount forgiven, spread over, say, the next 18 months.

If all else fails and you have to walk away from the house, at least leave with your credit rating in tact. Nazur says in California and other high cost states, he’s seeing a lot of “short sales,” where cash-strapped homeowners sell for less than the balance owed on the mortgage. Then they “make arrangements with the lender to pay the difference over time.” This lets you avoid having “foreclosure” stamped on your credit history.

Another strategy to preserve your credit rating is where the lender agrees to write off the loan and issues you a 1099 for the amount. The kicker, of course, is that you will have to pay income tax on this amount. Still, it’s better than getting your credit rating trashed. Nazur describes this technique as “very common.”

The point is: be proactive. Approach your lender before you get into trouble. Start by calling the phone number printed on your monthly mortgage statement. You know, right after the words “Call us.” They mean it.

Hope this helps,
Gail

If you have a question for Gail Buckner and the Your $ Matters column, send them to: yourmoneymatters@gmail.com, along with your name and phone number.